Opportunities
The Deferred Sales Trust provides great opportunities whether you are considering selling a highly appreciated asset or a business professional trying to bring “value added” to your clients.
There are opportunities to defer taxes and leverage that deferral into an income stream that can be passed on to your heirs that other parts of the tax code like Section 1031 can’t provide. Let’s consider many of the following opportunities.
But first, a quick commercial. Sorry. Because we are proprietary, most business professionals including CPAs and attorneys have never heard of us and that’s ok. The problem occurs when these professionals do not trust us because they are not familiar with us and automatically assume that we are a scam or an abusive tax scheme. We are anything but. The IRS has conducted 12 tax audits with the largest audit being on the sale with a $50 million tax deferral and our attorneys have successfully defended the trust every time.
Also, in 2019, the IRS audited our trust documents and all supporting documents and told our attorneys that they were satisfied with all our documentation. So, if a CPA or attorney says negative things about us, it’s probably because they are not familiar with us. Also, there is a lot of negative info on the internet by our competition who try to muddy the waters because they can’t compete with us. Ignore them.
OK, we’re back. Let’s look at some great opportunities that our trust can provide and generate more income for you.
WE can be a great opportunity for real estate professionals that work in the commercial, investment,
ranch, farm an any other real estate market where there are highly appreciated assets. Although a 1031
may be an opportunity to defer taxes for those that want to buy more real estate, our trust is a much
better option than a 1031.
What if you can sell today, defer the capital gains tax, state tax, depreciation recapture and the
Medicare tax today and have an unlimited amount of time to buy another property. Sell in a sellers’
market and buy in a buyers’ market and while waiting to find that property, your seller can receive a 5%
cash flow on the gross sales proceeds in the trust. And everything in the trust can be passed on to their
heirs. We can also accumulate more real estate wealth because we have a favorable depreciation
opportunity that a 1031 can’t.
What if however, the seller wants to sell and retire and doesn’t want more real estate? If the seller is
facing a large tax burden when selling, he/she might decide to keep the property and use the stepped-
up basis at death to pass on the property to their heirs. Of course, that assumes that Congress doesn’t
end the stepped -up basis, which is what they want to do, That could be a good strategy but with one
problem. You aren’t making a sale anytime soon.
It’s a good thing that I am here. Sorry, John Wayne. I came to the rescue first. Using the Deferred Sales
Trust, your seller can sell today, defer taxes today and retire today with a larger pretax lifetime
retirement income than if they paid taxes first. You make the sale. You’re welcome.
There are numerous other opportunities in the DST is better than a 1031 section including dealing with
partnerships, depreciation and diversification opportunities that a 1031 can’t provide.
HYPOTHETICAL SCENARIO
Commercial Property sale in NYC
Sales proceeds after
commissions and closing costs: . . . . . . $20,000,000
Seller’s Original Basis: . . . . . . . . . . . . . . . . . $5,000,000
Capital Improvements: . . . . . . . . . . . . . . . . $1,000,000
Depreciation: . . . . . . . . . . . . . . . . . . . . . . . . . . $4,000,000
Mortgage Balance at time of closing: . $2,000,000
Seller’s adjusted basis : . . . . . . . . . . . . . . . $2,000,000 (purchase price + capital improvements – depreciation)
Taxable gain: . . . . . . . . . . . . . . . . . . . . . . . . $18,000,000 (net sales proceeds minus adjusted basis)
Federal Tax 20-25% – Unrecaptured section 1250 gain applies
NY State & City Tax 12.7%
Medicare Tax 3.8%
Approximate Tax Due: . . . . . . . . . . . . . . . . $6,770,000
Approximate Tax Due with a Deferred Sales Trust™: . . . . . . . . . . . . . $0
Our trust provides a great opportunity when luxury residential real estate professionals sell luxury
residential properties where the sale will create a large tax burden to the seller. Our trust can defer the
capital gains tax, state tax and the Medicare tax on the gains of the sales proceeds. Since luxury
residential properties may generate hundreds of thousands if not millions in taxes, this can be a huge
advantage for a residential broker when trying to obtain a listing when there is competition for that
listing.
Another opportunity that our trust can provide is when a seller is considering renting his residence
rather than selling it because of the potential large tax liability. If you can defer the capital gains tax,
state tax and the Medicare tax, you may have just overcome your seller’s concerns and now he may be
willing to give you the listing to sell.
Branding can play a major role in selling great residential properties. But everyone brands themselves
for making the sale. Set yourself apart by branding after the sale. Not only do we want to get you the
best price possible when selling your luxury residential property, but we also want to maximize the sales
proceeds by helping you defer your tax liability and keeping more of your sales proceeds in your pocket.
And we do that after our commission check clears!
These days, it seems like so many residential real estate professionals are having to deal with discount
brokers. It’s becoming all about commissions and not service. What if you could beat them at their own
game? That’s right and here’s how. Say you’re talking with a prospect that bought his residence for
$500k 30 years ago and now he can sell for about $3.5 million. You believe that a 3% commission is
appropriate. Some discount brokers says he will sell your home for a 1% commission so he will save the
seller approximately $70k. Game over? No way. Look at the back end of the sale.
Keeping the numbers simple, you will cost the seller an additional $70k in commissions but wait. He is
going to have an approximate tax liability of at least 25% on a $3 million gain or roughly $750k. With the
discount broker, he will have to pay the $750k and it could be more depending on the state tax. In
California that’s another 13%. In New York an extra 10%, in Colorado an extra 5% and so on. Not only
can he defer that $750k in taxes and keep that in his pocket, but we will also be able to generate about a
5% cash flow just on the $750k or $37500 every year. In 2 years, the seller has recouped more than the
commission savings of the discount broker. Whose looking good right now?
One quick note. Say you’re going after a listing of a seller that has accumulated much wealth and his
family will have a federal estate tax burden when both spouses pass on. Using our trust, it may be
possible for the attorneys to take the asset when sold out of the estate to reduce the family’s federal
estate tax burden. Just another opportunity that your competition doesn’t have.
HYPOTHETICAL SCENARIO
Luxury Primary Residence in Los Angeles Mr. and Mrs. Taxpayer want to sell the highly appreciated residential property in California that they have lived in for ten years:
Sales proceeds after commissions and closing costs . . . . . . . $4,000,000
Seller’s Original Basis: . . . . . . . . . . . . . . . . . $400,000
Mortgage Balance at time of closing: . . . .$300,000
IRC sec.121 exclusion: . . . . . . . . . . . . . . . . . . $500,000
($250,000 per owner residing there for two of the last five years)
Seller’s adjusted basis: . . . . . . . . . . . . . . . . . $900,000
(purchase price + section 121 exclusion)
Taxable gain: . . . . . . . . . . . . . . . . . . . . . . . . . . $3,100,000
(net sales proceeds minus adjusted basis)
Federal Tax 20%
CA State Tax 13.3%
Medicare Tax 3.8%
Approximate Tax Due: . . . . . . . . . . . . . . . . . . $1,150,100
Approximate Tax Due with a Deferred Sales Trust™ . . . . . . . . . . . . . .$0
Most business brokers do a great job of getting their clients a great sales price, but you know the old saying “its not what you make, it’s what you keep”. The Deferred Sales Trust can be a great opportunity for your clients to keep more of their sales proceeds and provide the with a large pretax lifetime retirement income than if the business seller paid taxes first.
We can also give the business broker a tool in his/her briefcase that other business don’t have to provide “value added” and get more clients.
Unfortunately, there are not a lot of options to defer taxes when selling a business. There is an
installment sale but what happens if the buyer at some point in the future doesn’t want the business
anymore or maybe sadly is now in bad health. You may get the business back. Or instead, the new buyer
is doing so well, he is going to pay off the entire balance in one of the early years and now you have that
tax liability you were hoping to avoid.
A possible tax deferral program may be an opportunity zone. They are a bit complicated and may or may
not be an alternative depending on the business owners’ future objectives.
Charitable trusts and gifting programs may be an opportunity, but I am not sure that any of these
programs offer the advantages that our trust does. Our trust may also be an opportunity for a business
broker when working to obtain a client. Probably any business broker can suggest an installment sale or
any of the other alternatives but not any of them can work with our trust. WE can be a great tool in a
broker’s briefcase when in competition for a great sale.
CPAs are always looking for opportunities to help their clients pay less in taxes. Traditionally CPAs do not trust what they are not familiar with. Most have never heard of the Deferred Sales Trust because it is proprietary.
Include your CPA when appropriate in discussions with our tax attorneys so they can have a better understanding of our trust.The Deferred Sales Trust may provide a great opportunity to defer taxes and then leverage that tax deferral. So if a CPA has a client selling his/her business or highly appreciated land we may be able to help.
Also, when selling, we can take the property out of the estate to potentially reduce the family’s federal estate tax burdens.
Like CPAs, attorneys may not feel comfortable with a proprietary trust
they may know little about. Let our tax attorneys work with your attorney to gain a better understanding of our trust and how it can be beneficial to their clients.
When helping a client sell a highly appreciated asset, the Deferred Sales Trust may provide an opportunity to defer taxes until a better tax environment arises and there may be an opportunity under certain circumstances to again reduce the family’s federal estate tax burden.
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